"If you link to sites that are banned by Google for spamming, you are inviting the risk of getting banned for linking to a bad neighbor."
So first we should know that what is a bad neighborhood and how can we know that a site is a bad neighbor to link to before you get penalized by the search engines.
Bad neighbors are those websites who use unethical methods to get high rankings or are banned by the search engines for spamming. You should not link to a website if it uses unethical methods for achieving a high ranking in a search engine, spamming may work for them now but bet me it will not for longer periods. As soon, as search engines know that they are spamming they will banned and also the sites linking to that site may be penalized by lowering their rankings or even can be banned.
How the search engines understand that whether a site should be banned is a matter of controversy and those changes from time to time. Today a methodology may be ok, but tomorrow (in the next update) it may be considered unethical.
Google is one of the search engines that can classify sites as spam sites very quickly they can catch you as soon as you do it. If you exchange links with a site which has a PR 7 but it uses unethical methods so... what's going to happen, it may work for you now and you may also receive a PR of 6 but as soon as google catches that website. You may see your PR 0 in the next update.
You may heard of an ad network company, SearchKing. Their concept was to place text ads on sites that have a high PR score and use that PR as a way to gauge part of the value of the ad. An ad from a page with a PageRank of 7 cost more than an ad from one that had a PageRank of 6.
But, there was another effect of this network in Google's pagerank analysis system. When a site with high PR links to a site with low PR, a part of the importance is passed along to the site with low PR. Now when a high PR site feels another site worthy to link at because of the content, it is alright as it is the natural way to build PR. But in this case they were linking to poor quality sites against a payment and as a result in Google PR analysis, those sites were deemed as important one.
It was possible that after a certain period of time those not-so-worthy sites would have started to attain top ranks in the results, finally affecting the quality of the Google results. If they allowed this company get special treatment, the search results would get so messed up that they'd totally lose their relevancy after sometime. It was a threat to Google's successful business model.
Obviously, Google penalized the sites. SearchKing, the ad network site got a PageRank Zero penalty in the latest Google update. The main pages of the network of all hosted sites saw its PageRank reduced to half. These were the pages that had a high PR.
Their problem was that they were trying to sell and pass on the advantage of having a high PR to sites that may not be worth getting that importance.
So how do I classify who's a bad neighbor who's not?
We have already mentioned in this article some of the practices that are a reason for search engines to ban particular sites. But the “sins” are not only limited to being a spam domain. Generally, companies get blacklisted because they try to boost their ranking by using illegal techniques such as keyword stuffing, duplicate content (or lack of any original content), hidden text and links, doorway pages, deceptive titles, automatic-generated pages and etc. Search engines also tend to dislike meaningless link directories that conceive the impression that they are topically arranged, so if you have a fat links section on your site, double-check what you link to.
If you have outbound links to many different sites, such checks might take a lot of time. Fortunately, there are tools that can help you in performing this task. For instance, http://www.bad-neighborhood.com/
provides a tool that reports links to and from suspicious sites and sites that are missing in Google's index.